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Federal Reserve Proposes Rule Requiring Sponsors of Asset-Backed Securities to Retain at Least 5 Percent of the Credit Risk of the Assets Underlying the Securities

March 30, 2011

Circular No. 12297

The Federal Reserve Board has proposed a rule that would require sponsors of asset-backed securities (ABS) to retain at least 5 percent of the credit risk of the assets underlying the securities.

The rule, which will be proposed jointly with five other federal agencies, would provide sponsors with various options for meeting the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In drafting the proposed rule, staff at the Federal Reserve Board and at the other agencies sought to ensure that the amount of credit risk retained is meaningful, while taking into account market practices and reducing the potential for the rule to negatively affect the availability and cost of credit to consumers and businesses.

As required by the Dodd-Frank Act, the proposed rule includes a variety of exemptions from these requirements, including an exemption for U.S. government-guaranteed ABS and for mortgage-backed securities that are collateralized exclusively by residential mortgages that qualify as "qualified residential mortgages" (QRMs).

The proposal would establish a definition for QRMs—incorporating such criteria as borrower credit history, payment terms, down payment for purchased mortgages, and loan-to-value ratio—designed to ensure they are of very high credit quality.

The proposed rule would also allow Fannie Mae and Freddie Mac to satisfy their risk-retention requirements as sponsors of mortgage-backed securities through their 100 percent guarantees of principal and interest for as long as they are in conservatorship or receivership with capital support from the U.S. government.